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Do’s and Don’ts of Tort Reform

Five years ago a Florida jury somehow conjured up punitive damages
of $145 billion for a class of tobacco plaintiffs. Two years later
a California jury recommended a $28 billion treasure trove for a
single claimant. And in 1998 four major cigarette companies agreed
to the grandmother of all awards-a quarter-trillion-dollar
settlement to reimburse the states for smoking-related Medicaid
costs.

So it goes. Not just tobacco, but guns, asbestos, and a
cross-section of American industry described by one think tank as
the Mass Tort Monster: DDT, Bendectin, the Dalkon Shield, fuel
tanks, silicone breast implants, lead paint, fen-phen, and on and
on.

Since 1930, litigation costs have grown four times faster than
the overall economy. Federal class actions tripled over the past
ten years. Class actions in state courts ballooned by more than
1,000 percent. The U.S. Chamber of Commerce estimates that the
annual cost of the tort system translates into $809 per person-the
equivalent of a 5 percent tax on wages. The trial lawyers’
share-roughly $40 billion in 2002-was half again larger than the
annual revenues of Microsoft or Intel. In 2002 the estimated
aggregate cost of the tort system was $233 billion, according to
the actuarial firm Tillinghast-Towers Perrin. That cost represented
2.23 percent of our gross domestic product. Over the next ten years
the total “tort tax” will likely be $3.6 trillion.

When costs explode, proposals for reform are never far behind.
So we have been deluged by congressional schemes to curb
class-action litigation, ban lawsuits against gun makers and
fast-food distributors, cap medical- malpractice awards, and
otherwise enlist the federal government in the tort-reform
battle.

My objective in this article is not to document that tort reform
is necessary or desirable. That has been effectively done by many
others. Instead, I want to examine the types of reforms
proposed-especially the extent to which they are compatible with
our system of federalism.

The underlying premise is straightforward: No matter how
worthwhile a goal may be, if there is no constitutional authority
to pursue it, then the federal government must step aside and leave
the matter to the states. If Congress decides to act, it has to
identify authorization for each proposed reform.

One possible source of authority is the all-encompassing
Commerce Clause. As the country grew, some people believed that
many of its problems required national regulatory solutions. So
Congress earmarked a specific constitutional power to justify its
ambitious federal agenda. The Commerce Clause was the vehicle of
choice.

But the central reason that the clause appeared in the
Constitution was quite different. Under the Articles of
Confederation the national government lacked the power to regulate
interstate commerce. Each state was free to advance local interests
and create barriers to trade, without regard to prejudice against
out-of-state interests. The solution: a constitutional convention
at which, according to Justice William Johnson, “If there was any
one object riding over every other … it was to keep the
commercial intercourse among the States free from all invidious . .
. restraints.”

Today, instead of serving as a shield against interference by
the states, the commerce power has become a sword wielded by the
federal government in pursuit of a boundless array of socioeconomic
programs. But just because products are transported across state
lines and sold to customers in several states, that does not
justify federal intervention. To legitimately invoke the Commerce
Clause, Congress must show that federal action is both “necessary”
and “proper” to ensure the free flow of interstate trade. When it
comes to tort reform, neither criterion has been met. Substantive
federal reforms are not necessary because the states are enacting
their own reforms. Substantive federal reforms are not proper
because they cannot be harmonized with traditional concepts of
federalism.

Tort damages, even if related to a product that crosses state
lines, are very different from a tariff on interstate trade. The
objective of a tariff is to raise money and favor in-state
businesses by discriminating against out-of-state businesses. That
maneuver is contrary to our federal system and justifies
countermeasures under the Commerce Clause. By contrast, the purpose
of the tort system is to redress grievances-a state-based function
for more than 200 years. Yes, if a state’s tort law favors local
constituents, that might implicate the Commerce Clause. But
discriminatory laws can still be fixed by implementing procedural
federal remedies-about which more in a moment-leaving substantive
tort law in the hands of the states.

Medical Malpractice
Consider the repeated attempts by Congress to impose medical
malpractice reform on the states. Legislation that caps malpractice
awards and limits attorney fees has been before Congress no fewer
than eight times since Republicans took over the House of
Representatives in 1995. The hypocrisy on both sides of the aisle
has been thick enough to slice. For starters, the Democrats
professed their abiding faith in federalism. They were the same
Democrats who were apoplectic when the Supreme Court held in United
States v. Lopez (1995) that states are perfectly capable of
prosecuting the possession of guns near schools. Five years later,
in United States v. Morrison, the Court held that victims of
gender-motivated violence could not sue their assailants under
federal law. Predictably, both baby steps to rein in federal
authority were met by caterwauling from the Democratic left. But
some Democrats seem to have rediscovered federalism when it comes
to medical malpractice. Rep. Melvin Watt of North Carolina, for
one, says: “[F]or the life of me, I can’t figure out what the
federal nexus is.” Amen to that. Fans of federalism are happy to
welcome Watt and any other latecomers to the fold. And surely the
Democrats would be joined by Republicans, eager to affirm the GOP’s
traditional respect for state sovereignty.

Well, no, actually the Republicans had a change of heart. The
President called malpractice “a national problem that requires a
national solution.” He added that “any time a malpractice lawsuit
drives up the cost of health care, it affects taxpayers. It is a
federal issue.” Rep. Tom Feeney of Florida claims to have “wrestled
with the issue” of federal damage caps but decided it would be
unfair if doctors, concerned about malpractice, denied treatment to
Florida constituents. Local physicians unfairly ignore local
patients. How does that raise a national constitutional
question?

No doubt, Feeney is correct when he explains that outlandish
jury verdicts can drive up insurance premiums and cause doctors to
curtail services. And no doubt that scene could unfold in more than
one state-perhaps threatening a malpractice mess nationwide. But
not every national problem is a federal problem. State legislators,
courts, doctors, and their patients are not

Let’s start with the facts. Curtis Campbell’s negligent driving
killed one person and permanently disabled another. Campbell
himself was not hurt. His insurer, State Farm, refused to settle
the case for the policy limit of $50,000. Instead, State Farm
elected to litigate and told Campbell he had nothing to worry
about. The Utah jury had other ideas and found Campbell liable for
roughly $186,000-that is, $136,000 over the policy limit. Campbell
sued State Farm for bad faith, fraud, and emotional distress. State
Farm ultimately paid the full $186,000, but Campbell was awarded $1
million in compensatory damages and $145 million in punitive
damages.

The award was short-lived. Justice Anthony Kennedy, writing for
a six-member majority, put it bluntly: “This case is neither close
nor difficult. It was error to [grant a] $145 million punitive
damages award.” The Court said the facts of the case probably
justified a punitive award of about $1 million, the same as
compensatory damages. The conduct was not all that reprehensible.
Campbell was not physically injured. And comparable civil fines for
fraud were only $10,000. As to the ratio of
punitive-to-compensatory damages- 145 to 1-Kennedy made it clear
that the Utah courts had overreached. He did not impose a
bright-line test, but he did say that few punitive awards should
ever be higher than 10 to 1.

That was the majority opinion; now the three dissents. First,
Justice Ruth Bader Ginsburg, who accused the Court of judicial
activism-substituting “its judgment for that of Utah’s competent
decision-makers.” No doubt the Court does assume a
quasi-legislative role when it establishes guidelines for punitive
damages. Apparently that bothers some “liberals,” like Ginsburg,
some of the time-like when a federal court overturns a huge award
against a corporation. More often, however, the “liberal” justices
are accused of judicial activism, and the conservatives insist on
judicial restraint.

Judicial Activism versus Judicial Restraint
Those terms are misleading. Judicial restraint does not mean
deferring to a legislature or court that has exceeded its
constitutional authority. The crucial question is whether a statute
or common-law verdict violates the Constitution. Ultimately, that
determination is up to nine justices: not by imposing their own
policy preferences-that would truly be judicial activism-but by
applying the Constitution, based on a proper theory of that
document grounded in the Framers’ notions of limited government,
separation of powers, federalism, and individual liberty.

To be sure, we are asking courts to decide whether an award is
excessive. But judges are frequently called on to make such
assessments. Conceptually, an evaluation of excessiveness in the
context of a punitive-damage award requires much the same thought
process as the interpretation of other murky terms throughout the
Constitution, terms like cruel and unusual punishment, probable
cause, unreasonable searches, and just compensation, which our
courts regularly must explain.

In State Farm no statute dictated the outcome-just the common
law of tort, as interpreted by judge and jury. An appellate court
is uniquely qualified to review the common-law decision of a lower
court. So the real debate in State Farm did not center as much on
separation of legislative and judicial powers as it did on
federalism: whether the U.S. Supreme Court can set punitive-damage
guidelines for the state of Utah. And that debate revolves around
substantive due process, the doctrine sometimes invoked by federal
courts to prevent states from violating substantive rights
presumably secured by the Fourteenth Amendment.

Which brings us to the dissents by Justices Thomas and Scalia.
Thomas’s State Farm dissent is little more than one sentence: “The
Constitution does not constrain the size of punitive damage
awards.” Scalia’s dissent is not much longer: “The Due Process
Clause vides that the same legal rules applicable to a private
claim by an injured party will also be applicable if the government
sues to recover indirect losses related to the same injury.

Recall the states’ lawsuits against the tobacco industry,
intended to recoup Medicaid outlays for smoking- related illnesses.
Here is what the president of the Maryland Senate blurted to the
Washington Post in describing his state’s litigation: “We agreed to
change tort law, which was no small feat. We changed centuries of
precedent in order to assure a win in this case.”

Under the proposed Fairness in Litigation Act, the same rules of
evidence, the same standards of responsibility, and the same burden
of proof would apply to the state standing in a plaintiff’s shoes
as to a plaintiff suing on his own behalf.

Federal Reforms
Finally, aside from state-based reforms, there are at least two
areas where the federal government can intervene without offending
long-established state prerogatives. The guiding principle is that
the federal legislature and courts are authorized to act when there
is a high risk that states will appropriate wealth from the
citizens of other states. One federal reform consistent with that
principle is to amend the rules that control state exercise of
so-called long-arm jurisdiction over out-of-state businesses.

Congress could, for example, preclude a local court from hearing
a case unless the defendant engages directly in business activities
within the state. A company’s mere awareness that the stream of
commerce could sweep its product into a particular state should not
be sufficient to confer jurisdiction. Companies are “aware” for
example, that their products could be re-sold or transported almost
anyplace. Instead, jurisdiction should be triggered only if the
company purposely directs its product to the state; that is, the
company itself exerts control over the decision to sell in the
state. A sensible rule like that would give firms an exit option:
they could withdraw from a state and thereby avoid the risk of a
runaway jury or biased judge, even if the company’s products
somehow end up in-state. Today, federal limits on long-arm statutes
remain lax or ambiguous. For that reason, oppressive state tort
laws remain a threat to out-of-state defendants.

There is a second federal reform that is compatible with
federalist principles: a new federal choice-of-law rule, which
would apply even when a company cannot afford to lose business by
exiting from a state. Basically, choice of law is the doctrine that
determines which state’s laws control the litigation when the
litigants are from different states.

Generally, plaintiffs can and will select the most favorable
forum state based, in part, on its tort laws. But suppose a federal
choice-of-law rule were enacted for cases involving multi-state
litigants. Suppose further that the applicable law were based on
the state where the manufacturer was located. A manufacturer could
decide where to locate, and its decision would dictate the
applicable legal rules. Consumers, in turn, would evaluate those
rules when deciding whether to buy a particular manufacturer’s
product. If a manufacturer were located in a state that did not
provide adequate legal remedies for defective products, consumers
would buy from rival companies.

Would there be a race to the bottom by manufacturers searching
for the most defendant-friendly tort law? Maybe. But more likely,
states would balance their interest in attracting manufacturers
against the interest of in-state consumers, who want equitable
product-liability laws. In effect, healthy competition among the
states would enlist federalism as part of the solution rather than
raise federalism as an excuse for failing to arrive at a
solution.

The touchstone of federalism is not states’ rights but dual
sovereignty-checks and balances designed to promote liberty by
limiting excessive power in the hands of either state or federal
government. When a state exercises jurisdiction beyond its borders,
discriminates against out-of-state businesses, or fails to give
companies adequate notice of what is required by the law, the
federal government should intervene. Otherwise tort reform is not
the business of Congress.